Executive compensation: CEOs post gains as profits rebound

7:48 AM MDT | July 29, 2013 | —Lindsay Frost

A surge in revenues and profits from shale gas helped lift US chemical profits in 2012—and took executive pay along with them. This year’s CW survey shows that the median increase for the 37 CEOs who held the same title in 2012 and 2011 was 19%, up from the 7.7% jump in 2011. Of the 43 total CEOs reported this year, only 5 changed from 201—showing a consistency in leadership over the past few years.

With the shale gas boom becoming the central focus of the US chemical industry, company boards are focusing executives’ compensation packages on performance measurements, particularly against peers. Increased shareholder input, with shareholder say-on-pay initiatives, is also becoming more prevalant. Though the cyclical nature of the industry has been a challenge for rewarding truly differentiated performance as opposed to benefit or punishment determined by external, cyclical factors, more challenges are arising as the retirement of top-level executives leaves some talent gaps.

“In the last couple of years, things have pretty well stabilized as far as compensation management by the boards. It’s now really about performance of the company and leadership to get paid for performance, essentially,” says Jim Aslaksen, co–global sector leader/chemicals and senior client partner at Korn/Ferry International, an executive recruitment agency. “With the enhanced governance respective taken by boards, they want to make sure performance and compensation—for the executive team and into the organization, as well as short-term annual bonuses—are truly aligned with the company.”

This year’s report shows that the median increase for the 37 CEOs who held the same title in 2012 and 2011 was 19%, up from the 7.7% jump in 2011. Of the 43 total CEOs reported this year, only 5 have changed from 2011—showing a consistency in leadership over the past few years.

Of the 12 highest-paid executives, 8 are the same from 2011, with the same positions held for at least two years. Former 3M CEO George Buckley had held the number-one spot in 2011 but left the company in February 2012. His successor, Inge Thulin, former COO, of the company, takes the number-six spot this year. Of the 161 remaining named executive officers that also held positions in 2011, the average increase was 13%. The largest compensation jump, 205%, is for Karyn Ovelmen, executive v.p. and CFO of LyondellBasell Industries.

Companies set up comparisons with a family of companies that they consider to be relevant when reflecting their own performances, Aslaksen says. They then use that information against historic markets, stock performance comparisons, and a number of other metrics to determine compensation for top executives. Andrew Liveris of Dow Chemical was the top earner in 2012, and the company says his compensation reflects his “leadership in identifying the economic volatility early in 2012 and taking decisive action to mitigate conditions.” According to Dow’s executive compensation proxy filed with the SEC, Dow reduced $613 million of gross debt and increased dividends in 2012.

Liveris: Dow CEO, top earner rakes in $23 million.

Gallogly: $21 million for LyondellBasell CEO.

Bunch: PPG CEO makes $17.8 million.

Angel: $17.7 million for Praxair CEO.

Kullman: DuPont CEO makes $15.6 million.

“Dow believes in pay-for-performance, which we implement through an annual incentive award that includes objective performance criteria and through equity awards where the value realized is tied to our stock price performance, including shares that vest only if certain performance hurdles are satisfied,” Dow says in the proxy statement. “These performance components represent at least 80% of the direct compensation of [named executive officers].”

“Pay packages tend to be focused relative to the peer group and not necessarily to the economic [environment],” says Andy Talkington, a senior client partner at Korn/Ferry. “They are not measuring against the S&P 500 or broader industries; the trends aren’t there yet. It’s like a horse race: Companies are racing against those in [their] pack, not the best horse out there worldwide. Their peer group is the focus.”

LyondellBasell indictes in its proxy that three major areas—health, safety, and environmental performance; costs; and business results—were a focus when determining executive compensation. Though the company’s revenues fell by 6% in 2012, its Ebitda increased by 5%—thus persuading the compensation committee to approve increased remuneration. The company says 90% of shareholder votes supported the final determination. “We believe that targeting total compensation, as well as each component of total compensation, at a median level supports a high-performing culture. The design of our program allows for significant potential upside, but only in the case of superior performance,” LyondellBasell says in its proxy.

Although the way compensation is determined has not materially changed in the last few years, a more sustainable performance measurement has entered into the compensation scheme, Talkington says. Performance shares are becoming the focus, and say on pay—the right of shareholders to vote on remuneration of executives—is being practiced in more companies. Of the top 10 executives, 9 of their respective companies practice say on pay with their shareholders, with the 10th company requesting a vote from shareholders to help determine the pay of executives—though it is not binding and directly tied to the final determination.

“What say on pay has done is cause boards to focus on more consistent measurements and mixes of long-term compensation. Changing [compensation] for one thing or something else is going by the wayside pretty quickly,” Talkington says. “Say on pay from groups and shareholders is the way it’s going.”

Increased focus from the general public has also affected remuneration, though “it’s not specific to the chemical industry,” Talkington says. “The focus on the banking industry and compensation around the banking industry has heightened the focus [on executive compensation] and brightened the light on compensation in general on companies,” Talkington says. “The longer-term performance is the differential between the top executive and the bottom rung of ladder.”

The market for recruiting C-suite executives has been a difficult obstacle to overcome, and various incentives—such as compensation packages and longevity of career—are being used to recruit prospective executives to the chemical industry. The talent bench is not as deep as it once was, Aslaksen says.

“Because of demographics and the number of baby boomers reaching retirement age, we have succession issues in all organizations across the industry. The issue is that there is succession potentials in every company; an individual could move from one organization to another, but the numbers—and the academies of leadership training—are badly affected through economic issues and pure head-count, and the probability of someone emerging from an organization has been an issue,” Aslaksen says. “The other issue is the matrix aspect of organizations and the fact that people are long in their careers before getting through profit and loss responsibility. Couple that with the reduction in [expatriates] dropping off for economic reasons; they are all working against industry.”

To mitigate this issue, companies are beginning the recruitment process earlier—travelling to high schools, colleges, and tech schools—to demonstrate how attractive the industry can be, Talkington says. “Demographics created pretty big gaps in the leadership bench,” Talkington notes. “To mitigate the risk, [companies] identify the best talent and develop them as rapidly as possible.”

Growth is returning to the industry thanks to shale, but attractiveness is a separate factor. “The US was really stagnant-to-declining as the markets in the Middle East and Asia grew—but now it’s back with a very long supply: 50-plus years of shale gas, or maybe more... which speaks well for the US industry from a stability standpoint,” Talkington says.

The growing industry in North America will continue to help profits soar, driving up compensation—which industry hopes will attract new people. “There has been a tightness in the market over five years. This is stress on system, and supply/demand drives up compensation. This is made up with more bonus eligible positions,” Talkington says.

Methodology

CW has taken the compensation figures as reported in proxies or other public documents, as calculated by the companies to meet SEC requirements in the U.S. Rules for executive pay have been subject to the agency’s significantly enhanced disclosure requirements adopted in July 2006.

CW’s tables list salary; bonus; stock awards; option awards; non-equity incentive plan compensation; change in pension value and non-qualified deferred compensation; all other compensation; total compensation; and the year-over-year percentage change in total compensation. CW’s data was taken from each company’s summary compensation table, which sets out the total compensation paid to a company’s CEO, CFO and three other most highly compensated executive officers.

Firms must disclose a dollar value for all stock-based awards, including stock and stock options, measured at grant date fair value. As a result, CW no longer includes the net value of options realized during a given year in the total compensation figures, and it uses the reported dollar value of stock-based awards given during the year as reported to the SEC.